Contracts & Legal

Time and Materials Contract

A Time and Materials (T&M) contract is normally used in construction and product development when a company or employee agrees to be paid for their time and the material used for the development of a product.  T&M contracts are used when you can not estimate the size of the project or any of the changes that can occur while in development. A T&M contract is the opposite of a Fixed-Price Contract.

Definition: A Time and Materials (T&M) contract is an agreement between two or more parties describing the rough scope of a task based on an hourly fixed wage plus the cost of materials to complete the task.

Time & Materials (T&M) Contract Basis

A Time & Materials (FAR Subpart 16.6) contract provides for acquiring supplies or services on the basis of [1]

  1. Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, profit; and
  2. Actual cost for materials (except as provided for in 31.205-26(e) and (f)).

Time & Materials (T&M) Contract Regulations

The main regulations that govern T&M contracts within the defense acquisition System are listed below.

Website: FAR Subpart 16.6 “Time and Material Contract“

Website: DFARS 216.6 “Time and Material Contract”

Application: Time accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. See FAR 12.207(b) for the use of time-and-material contracts for certain commercial services.

When to Use a Time & Materials (T&M) Contract

A time and materials contract should be used when there are too many uncertainties in contract performance that will not allow the use of a fixed-price contract. When the scope of the job or its duration cannot be established before work begins, as is occasionally the case with building projects, time and materials contracts are the best option.

How to use a Time & Material (T&M) Contract

On the project’s objective and the desired outcome, the client and contractor concur. It might not be possible to outline every stage of the process. They settle on hourly pay for both the contractor’s employees and subcontractors within that framework. Along with markup for material pricing, the contractor also defines the materials that will be used.

What Should Be Included in a Time & Material (T&M) Contract

A time and materials contract should outline the project’s objectives and contain a fixed price for labor that accounts for wages, overhead, general and administrative expenses, as well as a profit margin. Freight, taxes, and markup should be included in the materials cost. The contract should include a not-to-exceed clause specifying a maximum price where necessary.

  • Wages: Hourly wages for laborers, subcontractors, and any other project employees should be included in the labor rates. Additionally, if relevant, hourly administrative rates should be included.
  • General and Administrative Expenses: The reoccurring expenses are typically anticipated on a project and agreed to beforehand.
  • Maximum labor hours: A maximum cost or portion of the expected price may be stated in the contract. This ensures that the project doesn’t go significantly over budget.
  • Cost Increases: Typically, the client is charged for the real cost of the materials plus a markup of 15% to 35%.
  • Limitation of time and materials: This restriction covers the costs of the entire project, not just labor. This enables the client to estimate their maximum spending.
  • Contractual Breach Clause outlines what will happen if either party violates the agreement. It might have provisions for liquidated damages, choice of law, venue selection, etc.
  • Disclaimers: A lot of contractors include disclaimers for warranties, particularly about the caliber of the client’s chosen product. The contractor might not want to be held responsible for the caliber of the materials the client selects if they are specific.
  • Terms of Modifications: In the majority of projects, modifications are necessary. The time and materials agreement should specify how changes may happen and when they become legally binding, regardless of whether the project requires the change or is the client’s decision.
  • Milestones for payment: The contract should specify when payments are due. This could happen at the project’s conclusion or at specific times. Periodic milestones, such as weekly or monthly ones, are another option

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Benefits of a Time & Materials (T&M) Contract

  • Easy to adjust to requirements changes
  • More flexibility over schedule changes
  • Easier contract setup
  • Ensures contractor will earn a profit

Downside of a Time & Materials (T&M) Contract

  • The customer takes a lot of financial risks
  • Tracking expenditures take more effort
  • No incentive for being efficient
  • Rising labor prices could eat into profit

Limitations of a Time & Materials (T&M) Contract

A Time-and-Materials contract may be used only if:

  1. The contracting officer prepares a determination and findings that no other contract type is suitable. The determination and finding shall be:
    •  Signed by the contracting officer prior to the execution of the base period or any option periods of the contracts; and
    •  Approved by the head of the contracting activity prior to the execution of the base period when the base period plus any option periods exceeds three years; and
  2. The contract includes a ceiling price that the contractor exceeds at its own risk. The contracting officer shall document the contract file to justify the reasons for and amount of any subsequent change in the ceiling price. Also, see 12.207(b) for further limitations on using Time-and-Materials or Labor Hour contracts to acquire commercial items.

Definitions: [1]

“Direct materials” means those materials that enter directly into the end product, or that are used or consumed directly in connection with the furnishing of the end product or service.

“Hourly rate” means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that is:

  • Performed by the contractor;
  • Performed by the subcontractors; or
  • Transferred between divisions, subsidiaries, or affiliates of the contractor under common control.

Difference Between a Time and Materials (T&M) Contract and a Firm-Fixed Price (FFP) Contract

The difference is fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. Where a time and Materials contract provides for a cost adjustment.

Consideration when choosing to use a Time and Materials (T&M) Contract

As a federal program manager and contracting officer, there are numerous crucial considerations to make when deciding whether to use a Time and Material (T&M) contract type for a possible project. Here are some crucial things to remember:

  1. Project Scope: Evaluate the project’s nature to see if a T&M contract is appropriate. When the scope of the task is ambiguous or prone to change and a firm-fixed price cannot be established, T&M contracts are frequently employed.
  2. Manpower and Materials: Assess the project’s manpower and material needs. T&M agreements pay the contractor for direct labor hours at set hourly rates as well as for acceptable material expenditures. Make sure the labor categories and rates are clearly defined and meet the requirements of the project.
  3. Cost Estimation: Collaborate closely with the contractor to create a reasonable estimate of labor hours and material costs based on the anticipated needs of the project. As the project develops, periodically evaluate and revise the estimate to ensure proper billing and cost management.
  4. Established Guidelines: Establish explicit guidelines for the contractor’s billing and invoicing, including with submission dates and necessary paperwork. Implement controls to verify invoice correctness and make sure costs are justifiable, allowed, and correctly justified.
  5. Cost Monitoring and Control: Create procedures for keeping an eye on and regulating costs all during the project. Keeping track of actual work hours, material usage, and associated expenses in comparison to estimates may be necessary for this. Review and evaluate expense data often to spot any trends or variations that might need to be addressed.
  6. Contractual Limitations: Choose the right restrictions and controls to achieve cost management and avoid unnecessary costs. This could entail putting a cap on the contractor’s labor and material expenses, defining a maximum contract value, or including clauses that allow for cost escalation.
  7. Change Management: Plan for future modifications to the project’s requirements or scope, and create processes for handling changes under the T&M contract. Clearly spell out the steps involved in submitting change orders, recording adjustments to labor or material costs, and receiving the necessary approvals.
  8. Choosing a Contractor: When choosing a contractor, consider their credentials, track record, and capacity to supply the necessary labor and materials efficiently. Think about their experience managing T&M contracts, their availability, and their track record. To ensure fair competition, do in-depth market research and take multiple bidders into consideration.
  9. Risk Allocation: Be aware that the government bears a large percentage of the risk associated with T&M contracts because the final cost will be determined by the actual labor and material costs incurred. To minimize risks and guarantee value for money, put in place efficient contract control and performance monitoring.
  10. Documentation and Reporting: Throughout the contract’s lifecycle, maintain thorough records of the labor hours worked, as well as material receipts, invoices, modification orders, and correspondence. Keep in constant contact with the contractor to guarantee efficient collaboration and timely resolution of any concerns.

Remember to adhere to all laws, rules, and regulations that may apply to T&M contracts, including the Federal Acquisition Regulation (FAR) provisions and any agency-specific recommendations. To maintain compliance and make wise judgments, speak with your company’s legal, financial, and technical professionals. There must be effective communication and collaboration with the contractor to properly control expenses, monitor progress, and complete the project’s goals.

Other Types of Contracts

– See Firm-Fixed Price Contract
– See Cost-Reimbursement Contract
– See Indefinite Delivery Contract
– See Incentive Contract

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Updated: 7/9/2023

Rank: G10.3